When identifying the three inside up and the three inside down candlestick patterns, it is important to note that the Harami pattern occurs after a long candle day that is in the same direction of the trend. Also important to note, is that in order for you to understand both the three inside up and the three inside down patterns, you must be familiar with the bearish harami and bullish harami signals. The Harami is the first indication that the trend has stopped and the third day confirms that the harami has indicated correctly. The three-day pattern is a modern era confirmation of the Harami pattern.
Criteria for Three Inside Up and Three Inside Down Patterns
- The harami pattern is the overriding signal component of this pattern.
- The harami body should be the opposite color of the long candle day.
- Day three has a close that is higher than the open of day one.(Three Inside Up) or lower than day one in the bearish indication.(Three Inside Down)
Three Inside Up and Three Inside Down Pattern Psychology
After a trend and the occurrence of a long body day, (that extends this thread), the harami pattern shows that the trend has stopped. A factor that helps identify the strength of the reversal is how large the harami is compared to the previous day’s body. A body that is relatively large indicates more strength in the opposite direction. Additionally, the magnitude of the strength in day three adds to the potency of the reversal.
The investment psychology incorporated into candlestick signals makes it easier to understand what is going on in an investor’s mind. The signals were created through hundreds of years of visual analysis and interpretation by successful Japanese Rice traders.
One of the biggest misconceptions of investors is that prices move based upon fundamental reasons when in fact prices move based upon the “perception” of fundamental reasons. The Japanese Rice traders discovered this many centuries ago. Why do prices go down when good news is announced? The answer is that the anticipation of that good news was already built into the stock price.
The psychology built into a major candlestick signal is simple common sense investment philosophy. When you learn how to utilize the candlestick signals correctly you now have the knowledge to improve your trading techniques for those trading entities you want to trade. You do not have to depend on canned programs that sometimes work and sometimes don’t work and you do not have to buy or sell stock recommendations blindly based on a research analyst’s recommendation.
